Question

Explain why the neoclassical economists believe that nothing much needs to be done about unemployment. Do you agree or disagree? Explain?

Answer 1

Since a recession is time period of the economy in which the price level is quite low and demand for goods and services are also very low. So the unemployment rate is very high, therefore the purchasing power is very low.

Hence according to keynesian economist, the economy can come out of the recession by increasing aggregate demand in the economy. The aggregate demand can be increased when government increases its spending. So when the government expenditure increases on health care, the production of goods and services increase in the economy, it means more economic activity. So the employment increases in the economy. Hence an increase in the AD leads to increase in the GDP and employment in the economy and economy comes back from recessions.

Hence during the recession an appropriate fiscal policy is either an increase in the government spending or a decrease in the tax.

All this can be seen in the below diagram.

AS, E2 P AD AD Y2 Real DPC) E4lect ofneens et Spending heltheare AD C+I+nt x- wlth aADAhere AD thrfere AD suit Aitwond Pmice level